The DeFi derivatives market is set to explode in 2021, allowing traders and investors to make huge returns. To understand why this is possible, we need to explore the history of derivatives in DeFi and examine what is happening with the landscape right now to suggest significant growth within this year.
Firstly, what is a derivative?
For those unfamiliar, derivatives are financial securities (or contracts) that derive their value from something else, such as an asset or collection of assets. Derivatives are extremely common in traditional finance, as they allow people to invest in things that are backed by something else, like a stock, bond, commodity, or currency. One of the most common types of derivatives is futures, which is where you invest in what you think the future cost of an asset will be at some point in the future. Essentially, derivatives are contracts where people agree to trade certain assets at specific pre-established prices.
A brief history of DeFi derivatives
To understand DeFi derivatives, it helps to take a brief look at how they started. The first DeFi derivatives market to gain some traction was Synthetix, a project launched in 2017 that allows people to create decentralized blockchain assets pegged to other assets such as fiat cash cryptocurrency, and even stocks, and physical goods such as commodities. These newly created assets are referred to as synths on this market. Since then, there have been numerous other DeFi derivative platforms, such as Hegic, Pulse, and Mirror.
What’s so good about DeFi derivatives?
There are several benefits that DeFi derivatives offer that traditional CeFi (centralized finance) derivatives do not. Firstly, they are more accessible. Like all DeFi projects, people do not need to provide personal information such as proof of ID, previous bank statements, national insurance, or social security numbers. This is because DeFi projects do not need to prove your identity or eligibility, nor can they, as they are not centralized. Considering how many people do not own documents like these, more people can access DeFi derivatives than they can CeFi, as CeFi projects are generally required to ask for this info. Because of this, DeFi derivatives have the potential to grow significantly higher than CeFi.
DeFi derivatives markets allow anybody to create synthetic contracts pegged to other assets. This is in stark contrast to standard CeFi derivatives, which are created by a centralized body. The fact that anybody can create derivatives means that many more derivatives can be made, as there are more people to make them. They can be created transparently, as they are managed by blockchain and smart contract technology that anybody can look at and assess for themselves.
The current state of DeFi derivatives
These are all excellent reasons to follow the DeFi derivatives market, but what exactly makes people think 2021 will be a standout year for this industry? For starters, data from 2020 estimates that the derivatives market is now worth 15.5 trillion in gross market value and that despite COVID, the market saw a 34% increase. Considering how the world has now started to emerge from the pandemic, it is sure to continue increasing. If DeFi markets allow people to create their derivatives, then the market will grow at an even faster rate.
Another huge positive for DeFi derivatives is that in December 2020, Ethereum 2.0 (AKA Serenity) was launched. This helps Ethereum become more scalable, meaning that it can handle more users, transactions, blockchain activity, lower transaction fees, and speed up transaction times. Serenity is significant for DeFi, as most projects run on the Ethereum network. Considering the size of the derivatives market, this update is sure to help grow the DeFi landscape.
Finally, as DeFi has been receiving a great deal of media attention in the last few months, it will be drawing in more investors and enthusiasts. Many people will be excited to try creating their DeFi derivatives on just about any asset they can think of.
With these factors in mind, it is easy to see why so many people keep a tab on what happens with DeFi derivatives. It is certainly looking like 2021 will be a massive year for this industry and could mark the beginning of traders choosing DeFi over CeFi when it comes to derivatives.